Despite an overwhelmingly clear business case, bringing the cumbersome, paper-based trade system into the digital age is proving to be a more difficult task than many had anticipated.
In recent months, a once-exuberant landscape has become littered with failed initiatives, among them we.trade, HSBC’s Serai, Maersk and IBM’s TradeLens, as well as the recent insolvency filing by trade finance blockchain consortium Marco Polo Network.
During the Centre for Digital Trade and Innovation (C4DTI) Digital Trade Conference held in London on April 3-5, GTR chaired a panel discussion with a group of industry experts to explore what lessons can be taken from these setbacks.
The speakers – Bhriguraj Singh, chief product officer of global trade and receivables finance at HSBC, Bertrand Chen, CEO of Global Shipping Business Network (GSBN), Sean Edwards, chairman of the International Trade and Forfaiting Association (ITFA), Frank Wendt, CEO of Wendt Finance, and Lars Karlsson, global head of trade and customs consulting at Maersk – have all been on the front lines of trade digitisation attempts, to varying degrees of success.
During the panel conversation, they shared their views on what needs to be done differently in the future to ensure digital trade projects succeed in the long term, and six key themes emerged.
Defining the right business model and incentive design is vital
Assessing previous attempts at digitising trade, the panel speakers identified numerous reasons for their inability to reach scale, including the struggle to come up with a proper product-market fit, weak business models, and an initial cost play that did not add up over time.
“Some initiatives came in with value propositions that didn’t really deliver for all the parties in that ecosystem,” said Singh. “At the beginning, an initiative will address friction, and it’s a cost play. As you get a network effect, and it scales, then you get the true value of the network where you get the revenue play. Initially, therefore, the cost benefits of investments in these platforms aren’t that compelling, because they are simply cost reduction initiatives.”
Defining TradeLens’ demise as “an expensive learning” as opposed to a failure, Karlsson said the initiative taught Maersk several important lessons, including the need for a well-defined aim and a clear commercial vision.
“If you want to take an initiative in a certain direction, it needs to be set up from the beginning in the right way. In hindsight, it would have been better to have had partners such as international organisations who were willing to take over some more of the responsibilities or the governance,” he said.
GSBN’s Chen added that building trust and encouraging data sharing among stakeholders needs to be a priority, as a well-defined business model can enable application builders to create value for the ecosystem that is specialised for different subsets of customers.
“If you do not have a not-for-profit business model, it’s very hard to convince people to share data,” he said. “The platform is not just about the technology. In addition, success is based on whether you can convince your members to be patient enough to reach scale before they lose patience.”
Timing is everything…
Although the concept of digitising trade has been around for some time, the industry is still in the early stages of adoption, and the timing of a project can make a significant difference in terms of its success.
As an example, in 2020, Swiss-based fintech FQX brought the promissory note into the digital age, offering a working solution to corporates and financial institutions to issue and transfer trade loans and commercial paper, liquidate trade receivables or extend payment terms – digitally. However, the initiative did not achieve widescale take-up.
“You can have the greatest idea, but if you have the wrong timing, it doesn’t matter,” said Wendt, who co-founded FQX. “We had a functional system that worked, and we did multi-million-dollar transactions, but it didn’t scale. For me, the learning here is that timing is crucial. It is important to look at where is the industry standing in its lifecycle. We learned that people are risk averse and don’t want to be the first to make a move. However, you need pioneers in the lifecycle of innovation, otherwise you won’t get started.”
“Timing is everything,” added GSBN’s Chen. “Google was not the first search engine. Facebook was not the first social network. For something to be successful and create long-term value, it doesn’t have to be the first. Not only that, with the benefit of time, second-movers can see the mistakes made by those who go first, and have a chance to potentially think about what to avoid.”
“There is no first-mover advantage, so the thinking is often that you may as well wait for the network to scale and then come in,” says HSBC’s Singh. “Having said that, there’s a lot of impetus and momentum, and a number of things are happening, including the work by the International Chamber of Commerce (ICC) and C4DTI on standards, that will increase the chance of success for future initiatives.”
…and the time is now
Panellists were unanimous in their belief that the environment for trade digitisation has become orders of magnitude more conducive of late, thanks to recent wins including the adoption of digital rules and standards, and legal reform to enable the use of electronic trade documents in jurisdictions such as Singapore and the UK.
“There’s a tremendous tailwind pushing for the adoption of the electronic bill of lading (eBL),” said Chen, pointing to the recent commitment by nine of the world’s major ocean carriers to achieve 100% eBL usage by 2030. “What is further reinforcing this is the legal transformation that’s happening. Finally, everything is pushing in the same direction, whereas this was not the case two years ago.”
An increasingly dynamic global supply chain compliance landscape is also acting as a further push for the adoption of digital tools, added Singh.
“From a regulatory and a geopolitical perspective, the requirements for data around trade are becoming more complex, and if you continue to have it on paper, it’s going to be that much more problematic, creating an even greater need to digitise,” he said.
Small steps can make a big impact…
As large-scale digitisation projects continue to disappoint, panellists discussed how testing and scaling successful, smaller, initiatives could lead to more widespread adoption.
ITFA’s Edwards advocated for collaborating on smaller applications rather than taking a “boil the ocean” approach. “We like the big news story. We like the big success. And everything is there for it to happen, but it won’t happen through a big bang,” he said.
Karlsson added that there are already successful examples of using data in supply chains, such as the UK government’s Ecosystem of Trust pilot, in which Maersk is collaborating to provide supply chain data to improve the flow of goods and create efficiencies for companies involved in trade.
“There need to be process changes as well,” he said. “We’re not trying to simply digitalise paper. There needs to be value for users in one way or another, such as sustainability, resilience and predictability, and you can do that with small steps.”
… but thinking big is still important
However, given the interconnected nature of trade, a global approach to digitalisation is still important, said GSBN’s Chen. “The shipping industry is a co-ordinated system of many parties with different locations, jurisdictions and ways of operating that require a common way to exchange information. The idea that just because the big push didn’t work then we should be aiming for small applications in isolation is wrong, because that will create a fragmented ecosystem of applications that don’t talk to each other.”
Underscoring the critical importance of standards to the success of any digital applications, he added that a pathway towards adoption could be via central infrastructures that can connect to multiple solutions, which could remove the paralysis of choice that is holding back take-up.
HSBC’s Singh struck a positive tone on the potential to connect trade’s multiple digital islands.
“Small pockets of small ecosystems will get digitised. If a killer app happens, great, but I don’t see that happening. But there’ll be successful ecosystems. We have a proliferation of procure-to-pay and order-to-cash platforms, where buyers and sellers are talking, and as finance digitises, we can embed into them through APIs. So even though there are digital islands, we are creating technology that reduces the cost of integration with a variety of platforms,” he said. “Meanwhile, you’ll have the bigger, slower movement, which is laws changing and the adoption of standards. Both are going to happen, and we will go where our clients go while supporting industry initiatives that will take a little longer to materialise.”
Despite setbacks, the future of trade is digital
While the experiences shared by the industry experts on the panel demonstrated that achieving trade digitisation is far from simple, all remain convinced that success is within reach.
“We’ve learned from these mistakes, and we’ve learned from some of the experiences. Digitisation matters, its benefits are real, and we will continue to invest in it,” said Singh.